Clive Palmer conned by Coalition

Peter Martin

Clive Palmer has been conned. In the most exquisite of ironies he has allowed the Coalition to water down financial advice rules without first seeking advice.

"I didn't become a billionaire by listening to advisers," he said after he closed the deal, dismissing concerns the regulations he had endorsed would condemn ordinary Australians to years more of seeing advisers partially on the take from the firms whose products they advised on.

He’d insisted on safeguards. Fees and payments would be out in the open. It would help.

Palmer has probably never sought advice from George Loewenstein. The Carnegie Mellon University professor does cutting-edge research in the netherworld where economics meets psychology.

Loewenstein says if advisers admit they are getting kickbacks their clients often don’t know how to assess the information. The clients don’t know much about the field. That’s why they are seeking advice. Sometimes it makes them more trusting. If an adviser is going out of his or her way to be honest the client might “place more rather than less weight on the adviser’s advice”.

The adviser on the other hand might feel emboldened, “exaggerating their advice in order to counteract the diminished weight that they expect estimators to place on it”.

His experiments find advisers make more money when they disclose kickbacks and their clients make less (because they receive even more biased advice). They are also keener to help out advisers by buying the products that will give them kickbacks.

If you doubt that Australians are extraordinarily bad at appraising the worth of their financial advisers, consider the results of this Australian Securities and Investments Commission survey, detailed in the interim report of the Murray financial system inquiry delivered on the day that Palmer caved.

Eighty-six per cent of the Australian customers surveyed said they had received “good-quality advice”. Eighty-one per cent said they trusted the advice “a lot”. But when ASIC examined the advice it found only 3 per cent was good, 58 per cent was adequate and 39 per cent “poor”.

The advisers who renounced commissions were the most likely to provide good advice.

“Unsurprisingly, where advice fees were contingent on a product recommendation there were numerous examples where the advice appeared to be structured towards recommending or selling financial products,” ASIC reported.

The regulations Palmer has agreed to will allow banks to continue to reward advisers for shifting their products. The only constraints are that the advisers must work for the banks, they must style themselves as “general” rather than “personal” advisers, the payments cannot be ongoing and they must not be made “solely” because of the volume of product they have shifted.

Payments or in-kind payments not linked to the sale of a particular product are fair game, among them payments for training, promotion, conferences in remote locations, the upgrade of computer systems and direct payments to staff who “execute” trades recommended by advisers.

They are generous loopholes. They would have been illegal had Palmer not caved.

The Murray report doesn’t think much of them. It has suggested banning the use of the term “adviser” in such circumstances, relabelling it “sales” or “advertising”.

The inquiry’s chairman David Murray knows about what masquerades as financial advice in Australia. He used to run the Commonwealth Bank.

“Advisers” are allowed to practise in Australia with as little as six hours' training, although it’s often more - sometimes six weeks. In Canada, Hong Kong, Singapore, Britain and the US would-be advisers need to sit a national exam. Not here. I know of one economist with impeccable finance market credentials who wanted to work as a financial adviser to give something back. He was turned away because he hadn’t worked in sales.

Unfathomably, there’s not even a public register of who does and who does not have an adviser's licence. (Palmer is on to this one. He demanded a register as a condition of agreeing to water down the rules.) If there was a register potential clients could see how long an adviser had been practising and whether they had ever been struck off.

So limited are the regulator's powers that when advisers do get stuck off they simply pop up elsewhere. Murray says ASIC can prevent someone being an adviser but can’t prevent them from managing advice firms, something struck-off advisers often do.

In Britain, the Financial Conduct Authority has “product intervention” powers. It can review products or product categories and take them off the market. In Australia, ASIC can only warn.

And it can do next to nothing about advisers who sell insurance. Incredibly effective lobbying by insurance providers means that under both Labor’s old rules and the Coalition’s new ones advisers can continue to accept commissions from insurance companies. It’s why advisers often ask: “Would you like insurance with that?” The commission is often as much as 110 per cent of the first year’s premium. It’s a powerful incentive for advisers to advise their clients to switch, regardless of the consequences.

David Murray is on to it, even if Clive Palmer is not. But there’s hope. The regulations Palmer waved through apply only until December 2015. In November 2014 Murray presents his final report. Palmer’s no fool. He would probably be horrified at the state of the industry if he took wider soundings. He has 18 months in which to do it.

34 comments so far

The suspicious West Australian con job "granting" mining and or exploration rights and leases in the traditional lands of the Aboriginal People may well evolved into a far greater problem for Clivasaurus Rex.

Commenter

Geronimo

Location

Yippee Yi Yo

Date and time

July 29, 2014, 6:51AM

Warren Mundine?

Commenter

A country gal

Date and time

July 29, 2014, 1:58PM

What about the rest of the political class? Whomever drafted the legislation? Or ASIC? Or the ACCC?

Nah. It's all Clive's fault.

Commenter

Voltara Smith

Location

Brisbane

Date and time

July 29, 2014, 7:28AM

PUP has no place in determining Australia's future. Palmer is only interested in himself. He said he would raise aged pensions ny 25%. He has had months and done nothing. pensioners will remember.

Commenter

Scotty

Date and time

July 29, 2014, 12:33PM

Drafted for the big banks, by the big banks.

Commenter

Stopthelies

Location

WA

Date and time

July 29, 2014, 1:10PM

Only 18 months for the banks to prey on the poor and financially illiterate. I bet they are ramping up as fast as they can. Plenty of that will also be pouring into the Liberal coffers in the hope they can buy another 3 years.

Commenter

Steve

Date and time

July 29, 2014, 7:47AM

This is certainly worth a look at - to see what the Banks are donating to the LNP.http://periodicdisclosures.aec.gov.au/SummaryDonorGroup.aspx

Commenter

Jump

Date and time

July 29, 2014, 12:27PM

+1 started already - as I was eating my lunch got a call from the CBA selling everything from an overdraft to new investment and insurance. All I had to do was say Yes.

Commenter

Cryin

Location

Out

Date and time

July 29, 2014, 12:44PM

Maybe Clive wants to keep the big 4 onside - the Abbot Point coal port has not been fully funded yet.

And the big four banks are the main beneficiaries of this watering down.

Commenter

Stopthelies

Location

WA

Date and time

July 29, 2014, 1:15PM

Not just the poor and illiterate.

Full disclosure is now NOT required. This could happen to anyone who banks with the big 4.